APAC Real Estate Investors Adjust to New Market Forces Amid Rebound From COVID-19 Sponsored Feature

The COVID-19 pandemic rocked real estate markets across Asia Pacific during the first quarter, and weighed on investor sentiment after property transactions had reached record highs during 2019.

This year, government stimulus packages have provided protection for jobs and livelihoods, and helped maintain a reasonable level of employment. Global property consultancy Colliers International believes, while predicting ongoing volatility, that once governments start introducing growth stimulation policies, economic activity will start to recover, and in a recently released report points to investment opportunities arising around the region.

With some governments in the region, such as China, having put in place policies to bolster the market, real estate investment is already on the rebound in some of the first countries to feel the impact of the novel coronavirus, according to top executives with Colliers’ Capital Markets and Investment Services team in the region.

Active Measures Lead to Recovering Markets

Throughout the pandemic, Colliers’ brokers across the region have been working both with clients hoping to dispose of assets to free up cash flow, and with fund managers and corporates looking for new opportunities to invest as the market shifts. From these experiences, the company’s team is already seeing trends emerging.

“While many investors are likely waiting for economic activity to recover before committing to transactions, we are seeing a gradual increase in smaller-sized deals taking place in markets where active measures were taken to contain and manage the pandemic early, such as in China, South Korea and Taiwan,” said Terence Tang, Managing Director of Capital Markets and Investment Services for Asia at Colliers.

Tang, who leads the company’s services to capital markets investors in the region, explained further that investors preference for markets with steady governance and strong growth has been further highlighted during this period. However, he added that beyond the emphasis on stability, investors are also looking closely at markets where governments have been proactive in responding to and managing the effects of COVID-19.

China Leads the Way Back

While COVID-19 first made itself felt in China, and the nation underwent a strict lockdown during the first quarter which limited activity, Colliers’ mainland team has already begun to see improvements in the market.

“China was the first country to re-open for work and re-start production, and while investments have been disrupted, investment strategies have not changed,” said Betty Wong, Colliers’ Managing Director of Capital Markets and Investment Services for China. “We are starting to see a rebound in consumer confidence and spending power, and this in turn, is likely to be reflected in the domestic investor as well.”

Wong noted that, with international travel currently restricted, domestic investors are currently dominating investment transactions. The veteran advisor also pointed out that while the mainland government was quick to bolster liquidity early in the year, the authorities in Beijing, along with local governments, have since moved beyond those monetary measures in an attempt to rekindle demand through new policy measures and via bond issues to support a new round of infrastructure investment.

With these policies in place, Wong is now convinced that, while economic activity in China is likely to remain subdued during the remainder of the second quarter, demand can be expected to pick up in the second half of the year.

Core Markets Hold Opportunity

Beyond the nascent recovery in mainland China, Colliers’ team is seeing renewed transaction activity in some sectors of the region’s core markets, particularly smaller scale office deals in Hong Kong, where buyers are able to find lower transaction prices compared to last year.

“While hotels and retail are arguably the hardest hit sectors, what discounted transactions we have been seeing up to this point are primarily for strata-title offices, said Antonio Wu, Colliers’ Deputy Managing Director for Capital Markets and Investment Services in Hong Kong.

Wu cited recent trades of office floors in the financial hub where deals have transacted at prices at least 25 percent less than the most recent previous deals in the same building. The Colliers executive pointed to Kowloon East as the hottest location for such marked-down sales at this point, but said that, with a few units in Central and Admiralty falling into receivership, assets in these traditional core markets may become available soon.

For retail and hotel properties, transactions remain muted, but Wu predicted that discounts will also need to be expected when these sectors stabilise in the coming months.

On the other hand, Wu noted that data centers are becoming increasingly more appealing. “Data centers are attractive to investors, real estate funds and property developers, as well as many DC operators that are buying and building their own sites. It’s a fast-growing sector in Hong Kong and one that we are watching closely given the city’s well-governed Personal Data (Policy) Ordinance and the relatively stable power supply for DC operations,” said Wu.

In Singapore, Colliers’ Tang noted that investors are still in “wait-and-see” mode as the city emerges from the “circuit breaker” which has curtailed business activity. Based in Singapore, Tang predicts that the market will stabilise in his hometown as teams head back to the workplace and economic activity starts to recover.

Logistics, Data Centres Gain Ground

Beyond the emerging geographic trends, Colliers sees investors turning increasingly to those industry sectors best in sync with the current market, including logistics and data centres.

“Logistics as a sector has emerged as one of the brighter spots in 2020,” said Tang. “Given the growth of e-commerce in recent years, the warehouse market has been on the upswing, and with the pandemic, logistics has emerged as a defensive asset class.”

The investment advisor pointed to the boost that e-commerce has received from lock-downs around the region as a major stimulus for logistics investment.

In a related trend, the rise of remote working and stay-at-home families increasing their use of streaming services and mobile networks, have all boosted demand for cloud services. These bandwidth-hungry applications have added fuel to the already hot data centre market in Asia, which Colliers sees as a sector which will continue to gain favour with investors.

Australia, New Zealand Markets Prove Resilient

Australia and New Zealand are facing a temporary slowdown as the effects of COVID-19 have an impact on decision-making.

“In Sydney the uncertainty put additional pressure on traditionally low Q1 volumes, while Melbourne and Brisbane are expected to see a quiet Q2 after a record year for commercial transactions,” said John Marasco, Colliers’ Managing Director of Capital Markets and Investment Services for Australia. He added that, “Market activity has also been disrupted in Auckland though multiple transactions and contracts are still being negotiated”.

Marasco also noted that strong government policy measures and planned infrastructure investments are expected to help cushion the effects of the virus in these markets, which remain among the region’s most desirable and cost-competitive.

Understanding Risk Premiums

With 2020 already having wrought changes that few had anticipated at the start of the year, Colliers’ team advises investors to take stock of the risks and to be prepared for new pricing on assets as the year progresses.

“People will have to understand the risk premium and yields for different asset classes and will need to differentiate more than they had previously,” Tang said

He added that, “While investors are likely to have the opportunity to secure assets which they normally would not have had access to, they will also want to have more cushion in pricing risk premiums in their investments, which will translate into higher yields in the coming months.”

Learn more in Colliers International’s new report: Market Insights: COVID-19 – Implications & Recommendations for Asia Pacific Investors

This sponsored feature was contributed by Colliers International. All images are courtesy of Colliers International.